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They're cheap -- but there is a reason why Barrick Gold, Newmont Mining, AngloGold Ashanti, Kinross Gold, and Yamana Gold all trade for less than 10 times cash flow from operations per share.

It can be really tough to value gold stocks. That's because most valuation metrics, such as the price-to-earnings (P/E) ratio, require a company to actually earn money to be of any use. That has been a problem for gold stocks in recent years, because gold prices have been rather dull, leading many producers to post steep losses due to the writedown of expansion projects or reserves.

Having said all that, there is one valuation metric that cuts through this lack of earnings and shines a light on actual cash flow: the price-to-cash-flow from operations per share metric. That metric compares the underlying cash flow of a company to its stock price. In doing so, it also makes it clear that some gold stocks are actually ridiculously cheap right now compared to their peers. When we use that metric to compare the ten largest gold stocks, five really stand out:

Gold Stock

Price-to-CFO per share

Barrick Gold

8.0

Newmont Mining

9.2

Goldcorp

10.4

AngloGold Ashanti

5.4

Franco-Nevada

40.3

Agnico Eagle Mines

17.8

Randgold Resources

22.4

Kinross Gold

7.4

Yamana Gold

7.3

Royal Gold

26.2

Data source: YCharts.

The five gold stocks that stand out are Barrick Gold(NYSE:ABX), Newmont Mining(NYSE:NEM), AngloGold Ashanti(NYSE:AU), Kinross Gold(NYSE:KGC), and Yamana Gold(NYSE:AUY), because each sells for less than ten times its trailing twelve months' cash flow from operations per share. In some cases, that's more than half the price of a rival gold stock.

What makes these gold stocks so cheap?

One of the big weights on gold stocks over the past couple of years, other than the price of gold, has been the debt on their balance sheets. That's certainly the case with this group, with all five having elevated leverage ratios compared to their peers. In fact, Randgold Resources is basically debt-free, while Agnico Eagle Mines, Royal Gold and Franco-Nevada all have minimal net debt. Even Goldcorp has maintained a lower debt level than its cheaper rivals, boasting of an investment-grade balance sheet.

Those debt-light balance sheets have proven to be a competitive advantage because debt doesn't come cheap: it eats away at cash flow via interest payments. This is a big reason why investors aren't willing to pay as high a premium for the cash flow of higher-debt gold producers.

This is a weight that all five of these companies have been working to address over the past few years. Newmont Mining, for example, has sold $1.9 billion in assets since 2013 in order to bolster its balance sheet. As a result, Newmont Mining has improved its net debt-to-EBITDA ratio from a level above its peer-group average at the start of 2014 to well below its peer-group average last quarter. Barrick Gold, likewise, has jettisoned assets in order to improve its balance sheet, with the company reducing its total debt by $4 billion since the end of 2014; it plans to lop another $2 billion in debt off its balance sheet by the end of this year. We find similar debt-reduction stories at Kinross Gold, Yamana Gold, and AngloGold Ashanti. This is important because as these companies de-lever, more of their cash flow can be used for other purposes, such as shareholder distributions or growth spending, which is something that investors are willing to pay a premium for.

Another big weight that pulled down the valuations of these five gold stocks is their higher cost structures, which led to weaker margins at lower gold prices. This is another issue all five companies have worked hard to address, with each making meaningful progress. AngloGold Ashanti, for example, has lowered its all-in sustaining costs (AISC) by 11% year over year, to $910 per ounce. Likewise, Yamana Gold dropped its AISC last year by $40 an ounce across its core mines. Meanwhile, Kinross Gold's AISC last year was roughly flat from 2014, but the company sees it falling from last year's average of $975 to as low as $890 in 2016. By driving costs lower, these producers should be able to capture higher cash flows, which eventually could warrant premium valuations.

Investor takeaway

These five gold stocks are ridiculously cheaper than their peers because of their weighty debt and higher costs. Because of those problems, these gold stocks didn't warrant a premium valuation in a weak gold market. That said, all five have been working hard to improve their balance sheets and costs, which has the potential to narrow the valuation gap in the future, especially with gold prices improving this year.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Author

Matthew is a Senior Energy and Materials Specialist with The Motley Fool. He graduated from the Liberty University with a degree in Biblical Studies and a Masters of Business Administration. You can follow him on Twitter for the latest news and analysis of the energy and materials industries: Follow @matthewdilallo